Is There An Opportunity With Helens International Holdings Company Limited's (HKG:9869) 36% Undervaluation?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Helens International Holdings fair value estimate is HK$1.72
• Helens International Holdings is estimated to be 36% undervalued based on current share price of HK$1.10
• The CN¥1.71 analyst price target for 9869is comparable to our estimate of fair value.

How far off is Helens International Holdings Company Limited (HKG:9869) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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Is Helens International Holdings Fairly Valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (CN¥, Millions)	CN¥145.5m	CN¥136.4m	CN¥131.6m	CN¥129.5m	CN¥129.1m	CN¥130.0m	CN¥131.6m	CN¥134.0m	CN¥136.7m	CN¥139.9m
Growth Rate Estimate Source	Est @ -10.11%	Est @ -6.23%	Est @ -3.51%	Est @ -1.61%	Est @ -0.28%	Est @ 0.65%	Est @ 1.30%	Est @ 1.76%	Est @ 2.07%	Est @ 2.30%
Present Value (CN¥, Millions) Discounted @ 8.8%	CN¥134	CN¥115	CN¥102	CN¥92.3	CN¥84.6	CN¥78.3	CN¥72.8	CN¥68.1	CN¥63.9	CN¥60.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥871m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.8%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.8%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = CN¥140m× (1 + 2.8%) ÷ (8.8%– 2.8%) = CN¥2.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥2.4b÷ ( 1 + 8.8%)¹⁰= CN¥1.0b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥1.9b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of HK$1.1, the company appears quite undervalued at a 36% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Helens International Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.8%, which is based on a levered beta of 1.143. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Check out our latest analysis for Helens International Holdings

SWOT Analysis for Helens International Holdings

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For Helens International Holdings, there are three further factors you should assess:

1. Risks: Case in point, we've spotted 1 warning sign for Helens International Holdings you should be aware of.
2. Future Earnings: How does 9869's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every Hong Kong stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.